What Are Bitcoin Options?
Options are a common financial derivative across major asset classes — and since January 2020, they’ve been available for Bitcoin too.
Specifically tailored for the cryptocurrency market, they give holders the right, but not an obligation, to buy BTC at a predetermined price at a certain point in the future.
A primary advantage of Bitcoin options lies in how they enable traders to hedge their bets in a volatile market — meaning they could, in theory, make a profit even if prices fall.
There are two main types of Bitcoin options:
- Call option: Allows traders to buy BTC at a fixed price.
- Put option: Enables them to sell BTC at a fixed price.
Beyond that, there are three other important metrics to consider:
- Strike price: Refers to the rate when a contract can be exercised.
- Expiration date: When the contract terminates. Options can have varying time frames depending on the investor’s needs.
- Premium: Cost of entering into the agreement in the first place.
How Bitcoin Options Trading Works
Let’s imagine that Ellen takes out a Bitcoin call option — giving her the ability to buy BTC for $55,000 at any point in the next three months. She pays a $1,200 premium for the contract.
In this scenario, BTC surges to $70,000 within that time frame. The nature of this options contract means Ellen would be able to buy this cryptocurrency for substantially less than its market value. After the premium is deducted, she’d be left with a profit of $13,800.
Now let’s look at Paul, who’s purchased a put option. He enters into a contract that gives him the right to sell Bitcoin for $50,000 in the next 90 days. A sudden market downturn means BTC ends up tumbling to $40,000. The nature of this agreement means he’d be able to offload his cryptocurrency for more than it’s worth at current rates, delivering gains.
It’s worth making a quick distinction between American and European options at this point. In the U.S., options can be executed whenever the holder pleases. However, in the EU, these financial derivatives are only activated on the final day of the contract — resulting in a greater level of risk for holders.
Why Are Options on Bitcoin Popular?
Purchasing Bitcoin on the spot market can be a risky move for traders with a short-term outlook. Wild price swings in either direction can happen at any time — and a profit can only be made if this cryptocurrency rises in value.
By contrast, these derivatives offer greater levels of flexibility, all while limiting the amount of risk that a trader is taking on. If a call or put option doesn’t pay off — and the market moves in the opposite direction to what was desired — these contracts can expire worthless, meaning that losses are limited to the premium that was initially paid.
Other advantages include greater levels of liquidity in the cryptocurrency market, and potential arbitrage opportunities that enable eagle-eyed traders to capitalize on the difference between prices in the spot and options markets.
But the arrival of Bitcoin options contracts, first rolled out on the Chicago Mercantile Exchange, was especially significant because of how it allowed institutional investors to gain exposure to this digital asset without owning it directly.
Of course, there are risks to consider. Premiums for BTC options are often substantially more expensive than for other asset classes — and the trading platforms providing them can be at a greater risk of hacks that put user funds at risk. Those who use leverage also face the danger of magnified losses, and sudden market moves may result in high-value positions being rapidly liquidated. Because of this, it’s worth doing your research before getting involved.
Another downside lies in how Bitcoin options can have a detrimental impact on the wider spot market — especially when contracts worth billions of dollars near expiry. This has the potential to exacerbate volatility, spark sell-offs and dampen investor sentiment.
Bitcoin Options Pros and Cons
Pros
- Risk limitation: Losses are capped at the premium paid, offering lower risk compared to direct Bitcoin purchases.
- Flexibility: Traders can profit whether Bitcoin’s price rises or falls using call and put options.
- Liquidity: Bitcoin options provide greater liquidity and arbitrage opportunities.
- Institutional exposure: Allows institutional investors to gain exposure to Bitcoin without owning it directly.
Cons
- High premiums: Often more expensive than options on other assets.
- Platform risks: Potential hacks on trading platforms.
- Leverage risks: Using leverage can lead to magnified losses.
- Market volatility: Options nearing expiry can increase spot market volatility.
Do Bitcoin Options ETFs Exist?
In early 2024, the Securities and Exchange Commission in the U.S. finally approved the launch of exchange-traded funds based on Bitcoin’s spot price.
But at the time of writing, ETFs tracking the options market are pending. While the SEC has given permission for BlackRock to offer such a product within its iShares Bitcoin Trust, the plans are yet to be given a formal blessing by two other American regulators.
How to Buy and Sell Bitcoin Options
-
Choose a crypto exchange or broker
Select a platform that offers Bitcoin options, such as Binance, Deribit, or CME. Ensure it’s reputable and secure. Create an account if you don’t have one. -
Deposit funds
Deposit either Bitcoin or a stablecoin (like USDT) into your trading account. Some platforms may allow you to deposit fiat currency as well. -
Navigate to the options market
Once logged in, find the options trading section on your platform. Typically, you’ll see different options contracts available for Bitcoin, categorized by expiration dates. -
Choose call or put option
- Call option: Select if you think Bitcoin’s price will rise.
- Put option: Select if you think Bitcoin’s price will drop.
-
Set the strike price and expiration date
Choose a strike price (the price at which you’ll buy/sell Bitcoin) and the contract’s expiration date. -
Check the premium
Review the premium, which is the cost of buying the option. This amount is what you’ll pay upfront to enter the contract. -
Place your order
Confirm your option type (call or put), strike price, and expiration date, then place the order. If it matches the criteria on the market, it’ll execute. -
Monitor your option
Keep track of the option’s performance. If the market moves in your favor, your option will increase in value. -
Close the option
Before the expiration date, decide to sell the option for a profit or hold until expiration.- Profit: Sell the option if the market moves in your favor.
- Loss: Let the option expire if the market moves against you.
-
Collect profit or take the loss
If the option is profitable, you’ll collect the difference minus the premium paid. If not, your loss is limited to the premium.
Why Trust Cryptonews
in numbers
Anatol Antonovici 
Ihssan El Medkouri 
Camila Karam 